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TMI Blog2009 (1) TMI 339X X X X Extracts X X X X X X X X Extracts X X X X ..... gal in nature and which, according to the assessee, must be admitted to advance the cause of substantial justice, the assessee has also the following plea: "In view of art. 24(4) of the DTAA between India and Germany, since the appellant is a subsidiary company of DaimlerChrysler AG, Germany (a company listed on several international stock exchanges], which held about 76 per cent shares in the appellant, the appellant ought to be held a company in which public are substantially interested under s. 2 (18) of the IT Act, 1961, and, accordingly, s. 79 has no application in this case." 4. Learned counsel appearing for the AO, vehemently opposes the admission of the additional ground of appeal. He submits that since admission of this ground of appeal will require further investigation of facts, the same may not be admitted at this stage. It was submitted there is nothing on the record to even suggest, leave aside establish, that the assessee is entitled to any protection by the agreement, dt. 19th June, 1995, between the Republic of India and the Federal Republic of Germany for the Avoidance of Double Taxation with respect to Taxes on Income and Capital [reported in (l996) 136 CTR ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he CIT(A) has erred in holding that in view of the provisions of s. 79 of the Act, the assessee is not entitled to carry forward and set off the accumulated business losses. It is so for the reason that, in view of the specific provisions of treaty override enshrined in the Indian IT Act, 1961, it cannot be open to the tax authorities to read the provisions of the Act in isolation of the applicable tax treaty provisions. The tax treaty provisions constitute enforceable law and are not on any inferior pedestal than the provisions of the domestic legislation in this aspect. As Late Prof Klaus Vogel, in his oft referred book 'Klaus Vogel on Double Taxation Conventions', has observed that, "the treaty acts like a stencil that is placed over the pattern of domestic law and covers over certain parts". Dr Vogel's perception on this issue quite appropriately sums up the legal position in India as well. To the extent treaty provisions are beneficial to the assessee, these provisions simply override the Indian domestic law provisions. The benefits of treaty provisions cannot be viewed as options being available to the assessee, which the assessee mayor may not invoke. These are the provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... examined in the present case is the mandate of the law, so far as the disentitlement to carry forward and set off accumulated losses on account of change in shareholding is concerned, and such a mandate can only be ascertained when the provisions of the Act and the applicable tax treaty, if any, are read together. 7. As regards the questions raised by the learned special counsel about assessee's ineligibility to seek protection of Indo-German tax treaty and the factual contentions which are not unsubstantiated, these aspects, which essentially deal with the merits of assessee's plea, need determination on merits. Just because questions are raised on assessee's eligibility to seek treaty protection and on certain factual elements said to be embedded in assessee's contentions, the case of the assessee cannot be dismissed at threshold without even considering the matter on merits. 8. We will, therefore, take up the ground No. 3 raised by the assessee, as also the additional ground of appeal so admitted, together. As we do so, our concern is to adjudicate on the question whether or not, on the facts and circumstances of the case and in the light of the provisions of the Act read w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ---- -------------------- ------------------- |DG India (P) Ltd. | | DaimlerChrysler AG | | DC India (P) Ltd. | |with 81.33% stake | | Germany (DCAG) | | with 81.33% stake | |by DBAG | -------------------- | by DCAG | ------------------ ------------------- 11. As a result of the above exercise, there, was a change in shareholding pattern of the assessee company inasmuch as the shares held by DBAG were transferred to DCAG. Since these shares were more than 51 per cent of the total shares and the assessee company was not a 'company in which public are substantially interested' in terms of the provisions of s. 2(18) of the Act, prima facie the provisions of s. 79 were attracted. The assessee company stated this position and, in the notes attached to the financial statements of the assessee company, it was inter alia, stated. "In the previous year 1998-99, Daimler Benz AG (DBAG) and Chrysler Corporation (USA) merged into a new company DaimlerChrysler AG (DCAG). All the assets and liabilities of DBAG are transferred to the new company DCAG. The shareholders of DBAG has become the shareholders of DCAG. Upto the previo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sely held companies are not entitled to the benefit of carry forward and set off of losses of earlier years. As regards the amendment in s. 79 to give relief to the Indian subsidiaries of foreign companies, the AO was of the view that the amendment is applicable w.e.f. 1st April, 2000 and, therefore, it has not relevance so far as tax asst. yr. 1999-2000 was concerned. He thus held that the assessee is not entitled to carry forward and set off the accumulated losses. 14. Aggrieved by the stand so taken by the AO. the assessee carried the matter in appeal before the CIT(A) but without any success. The CIT(A) confirmed the stand of the AO, and concluded as follows: "The submissions have been considered. The appellant has relied on the amendment brought into s. 79 which is second proviso to s. 79 inserted by the Finance Act, 1999 w.e.f. 1st April, 2000. The second proviso to s. 79, which is in regard to change in the shareholding of Indian company, which is a subsidiary of a foreign company, as a result of amalgamation or demerger of foreign company, subject to the condition of 51 per cent of shareholding of the amalgamating or demerged foreign company to continue (as a shareholde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions can be invoked in a situation when no double taxation of income arises at all. In case the answer is in affirmative, the next step is to consider whether on the facts of the present case, the taxpayer is entitled to any benefits of the Indo-German tax treaty. In case we find that the assessee is entitled to any benefits under the said tax treaty, we have to examine the scope and impact of such treaty protection. Finally then, we can determine to what extent this treaty protection will override the provisions of s. 79 of the Indian IT Act. 18. Sub-ss. (1) and (2) of s. 90 the Indian IT Act, 1961, inter alia deal with the treaty override issue. These sub-sections, as they stood at the material point of time, are reproduced below for ready reference: "90.(1) The Central Government may enter into an agreement with the Government of any country outside India- (a) for the granting of relief in respect of income on which have been paid both income-tax under this Act and income-tax in that country, or (b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country, or (c) for exchange of information for prevent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent". While elaborating upon the scope of this amendment, CBDT Circular No. 7 of 2003, dt. 5th Sept., 2003 [(2003) 184 CTR (St) 33 : (2003) 263 ITR (St) 62] stated that: "In order to encourage international trade and commerce, the Finance Act, 2003, has inserted a new clause in sub-s. (1) of s. 90 so as to provide that the Central Government may also enter into an agreement with the Government of any country outside India for granting relief in respect of income-tax chargeable under this Act and under the corresponding law in that country to promote mutual economic relations, trade and investment." 21. A cursory look at the above developments may give a first impression that it was only with effect from the asst. yr. 2004-05 that the treaty override was available in respect of non-discrimination provisions, since until that time tax treaties could only be entered into for, as we have noted, preventing double taxation of an income in both the Contracting States, and for giving relief from tax when an income does get taxed in more than one jurisdiction. As for unilateral relief from income-tax being given by a Contracting State "to promote mutual economic relations, trade and inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he moot question, however, is whether in the absence of s. 90(a)(ii), as was the applicable legal position for the assessment year before us i.e., 2002-03, non-discrimination provisions of a tax treaty are covered by the treaty override. 23. It is important to remember that the provisions of s. 90(2) came into existence by Finance Act, 1991, though with retrospective effect from 1st April, 1972. The treaty override was, however, available in the scheme of the Indian IT Act much before that, and, as a matter of fact, right since inception of the Indian IT Act, 1961. The treaty override is provided by the provisions of s. 90(1) itself wherein it is stated that the Central Government may enter into tax treaties with the other Governments, for the purposes specified therein, and "may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement". It is in accordance with these powers for delegated legislation that the Central Government notifies the tax treaties and provides for implementing these agreements. The Central Government Notification No. 10235, dt. 29th Nov., 1996 [(1996) 136 CTR (St) 50], whereby the Indo-German tax trea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he CBDT thus clearly provides for an unqualified treaty override. It does not discriminate between natures of provisions of a tax treaty, though it does categorically state that the provisions of a tax treaty, which is entered into by the Central Government under s. 90 of the Act, will override the provisions of the Act. This circular has also received judicial approval in a catena of cases.. A circular issued by the CBDT is binding on all the AOs under s. 119 of the Act-to the extent it favours the taxpayer though. as is the settled legal position in India. The treaty override, in favour of the taxpayer, is thus unqualified and unequivocal. 27. While on this circular, it is also necessary to point out that the aforesaid circular was at times construed as having such an overriding effect of the tax treaties that even where the provisions of the IT Act were found to be favourable to the assessee, the same were ignored and treaty provisions were enforced. This lead to insertion of s. 90(2) vide Finance Act, 1991, though with retrospective effect from 1st April, 1972, which qualified the treaty override only to the extent the same is beneficial to the taxpayer. The rationale behind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on-discrimination clauses. As for Vogel's remark that "(such a) policy is justified by the argument that the purpose of a DTC is to avoid double taxation and prevent fiscal evasion; a rule against discrimination is not necessary to achieve these goals", we can only say that these views are traditional and narrow views of tax treaties and they no longer hold good in the contemporary world. The amendments brought about in s. 90(1)(a) reflect the ground realities and rightly indicate that in today's world the role of tax treaties is not only confined to avoiding the double taxation or to giving relief in respect of an income taxed twice; tax treaties are today seen as instruments of fostering economic relations. trade and investment. If avoidance of double taxation and giving relief in respect of income taxed twice are only legitimate objectives of tax treaties, there cannot perhaps be any justification for tax treaties with the countries which have no personal tax or even very limited corporate taxes. Even such countries have wide treaty networks now, and this fact by itself is proof enough to the ground reality that the tax treaties no longer exist only for avoidance of double taxat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e corresponding law in force in that country to promote mutual economic relations, trade and investment" is perhaps to deal with a situation in which an agreement is exclusively for the purposes of granting relief from domestic taxation on the grounds of political or economic expediency. Unless viewed in this perspective, the amendment is no more than clarificatory in nature. It is also evident from the fact that India-Mauritius tax treaty [(1984) 40 CTR (TLT) 4 : (1984) 146 ITR (St) 214], which was entered into over two decades before this amendment in s. 90(1) came into existence and which has received judicial approval from an authority no less than the Hon'ble Supreme Court of India, had, as one of the main objectives, 'encouragement of mutual trade and investment'. 31. In view of the above discussions, we are of the considered view that the treaty override, even before the 2004 amendments in s. 90(1), covered all provisions of the tax treaties, including the provisions relating to the non-discrimination. 32. The next question is whether the assessee, being a tax resident of India, is eligible for treaty protection in India from the provisions of the Indian IT Act. 33. Le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and in law distinct from the company in which he is a shareholder. He further submits his position is also reiterated in the 2008, OECD Commentary, to which India is a party. He has filed extracts from the said commentary, para 77 of which is reproduced below: "77. Since the para relates only to the taxation of resident enterprises and not to that of the persons owning or controlling their capital, it follows that it cannot be interpreted to extend the benefits of rules that take account of the relationship between a resident enterprise and other resident enterprises (e.g. rules that allow consolidation, transfer of losses or tax free transfer of property between companies under common ownership). For example, if the domestic tax law of one State allows a resident company to consolidate its income with that of a resident parent company, para 5 cannot have the effect to force the State to allow such consolidation between a resident company and a non-resident parent company. This would require comparing the combined treatment of a resident enterprise and the non-resident that owns its capital with that of a resident enterprise of the same State and the resident that owns its capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State to a resident of the other Contracting State shall, for the purpose of determining the taxable profits of such enterprise, be deductible under the same conditions as if they had been paid to a resident of the first mentioned State. Similarly, any debts of an enterprise of a Contracting State to a resident of the other Contracting State shall, for the purpose of determining the taxable capital of such enterprise, be deductible under the same conditions as if they had been contracted to a resident of the first mentioned State. 4. Enterprises of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first mentioned State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of the first mentioned State are or may be subjected." 37. A plain reading of the above treaty clauses shows that, in broad terms, the discrimination, which is prohibited under the treaty, is (a) nationals of the other Contracting State vis-a-vis national ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lause, i.e. under art. 24(2), it is not even necessary that the assessee seeking treaty protection in one Contracting State must belong to the other Contracting State. In the case of nationality non-discrimination clause, i.e. under art. 24(1), the assessee must be national of the other Contracting State, though resident or not. In the remaining two situations, i.e. non-discrimination against payments made to the residents of the other Contracting State, i.e., under art. 24(3), non-discrimination against capital held by the residents of the other Contracting State, i.e. under art. 24(4), it is not at all necessary that the assessees, in whose cases this non-discrimination is invoked, should be resident of, or even national of, the other Contracting State. In this view of the matter, we are unable to accept the plea of Mr. Kapila that since assessee before us is not resident of the other Contracting State, the assessee cannot seek treaty protection against discrimination, even if there be any. 38. Let us now consider the admitted facts of the case before us. The assessee before us is a company incorporated in and resident of India, and is, therefore, an enterprises of India. There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of art. 24(4) has following two aspects: -Identify 'other similar enterprise' of the Contracting State to which the assessee belongs; and -Compare 'taxation or any other connected requirements' of the assessee which are more burdensome than 'taxation or any other connected requirements' of such other enterprise of the Contracting State to which the assessee belongs. 40. The question then arises as to what are the 'other similar enterprises' with which the assessee before us must be compared with. 41. Learned counsel for the assessee, relying upon some observations made by Prof. Vogel and on the basis of OECD Model Convention Commentary, submits that art. 24 restrains a State from taxing a resident enterprise owned by non-residents in a manner which is less favourable vis-a-vis taxation of a similar resident enterprise. Our attention is invited to para 76 of the OECD Model Convention Commentary on art. 24 which is reproduced below: "This para forbids a Contracting State to give less favourable treatment to an enterprise, the capital of which is owned or controlled, wholly or partly, directly or indirectly, by one or more residents of the other Contracting State. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Kapila's contention is that "para 4 of art. 24 must be read in the context of other paras of the said article" and that "The expression 'similar enterprise' used in para 4 can only mean similarly placed and in similar circumstances". In other words, therefore, only other assessee companies, which have foreign capital, should be compared with the assessee before us. Mr. Kapila submits that there is no discrimination against the assessee company inasmuch as the assessee is not subjected to any other requirements which are more burdensome than other companies in which foreign capital is situate, as it is not even the case of the assessee that the discrimination against the assessee is vis-a-vis other foreign companies. As for the discrimination vis-a-vis companies in which domestic capital is invested, according to the learned counsel, these companies are not similarly placed or are in similar circumstances, and the provisions of art. 24(4) cannot, therefore, be of any avail to the assessee. Our attention is also invited to the following extracts from the OECD Model Convention Commentary on art. 24(5) of OECD Model Convention which is pari materia with art. 24(4) of the Indo-German ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany in which capital is held by a domestic company because these two companies are not under the same circumstances. 48. As we proceed to deal with the issue as to what will constitute 'similar enterprise' for the purposes of comparison with taxation or other connected requirements being more burdensome on the assessee vis-a-vis other similar enterprises in India, let us take a careful look at the context in which we are examining this issue. 49. The assessee before us in a domestic company. However, a substantial part of its equity capital is held by a public company domiciled in Germany, i.e. the treaty partner country in this case. In the relevant previous year, there was a change in shareholding of the company inasmuch as on account of merger of Daimler Benz AG with Chrysler Corporation Inc., USA, the shares were transferred from Daimler Benz AG to the newly formed company, as a result of this merger, which is known as DaimlerChrysler Inc. 50. It was in this backdrop that the AO had invoked disentitlement provision in s. 79 of the IT Act, as it then stood, which provided as follows: "Sec. 79-Carry forward and set off of losses in the cases of certain companies-Notwith ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 1956), to be a Nidhi or Mutual Benefit Society; (ad) If it is a company, wherein shares (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) carrying not less than fifty per cent of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by. one or more co-operative societies; (b) If it is a company which is not a private company as defined in the Companies Act, 1956 (1 of 1956), and the conditions specified either in Item (A) or in Item (B) are fulfilled, namely: (A) Shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) were, as on the last day of the relevant previous year, listed in a recognised stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 (42 of 1956), and any rules made thereunder; (B) Shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) carrying not less than fifty per cent of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. Sec. 21 of the Securities (Contract) Regulation Act, 1956 lays down that "where securities are listed on the application of any person in any recognised stock exchange, such person shall comply with the conditions of the listing agreement with that stock exchange". A plain look at the draft listing agreement, as are available on the website of several stock exchanges including Bombay Stock Exchange, would show that a listing agreement is possible only with 'a company duly formed and registered under the Indian Companies Act'. In terms of SEBI (Disclosure and Investment Protection) Guidelines, a company is defined as a company defined under s. 3 of the Companies Act, 1965. Sec. 3 of the Companies Act, in turn, defines a company as 'a company formed and registered under this Act' or under one of its predecessor Act. The only exception which is made out for issuance of the Indian Depository Receipts (IDRs) by foreign companies. SEBI guidelines are binding on the all the stock exchanges in India, and it is thus not possible for shares of any foreign company to be listed in India. As a corollary to the above legal and factual position, an Indian subsidiary of a foreign company would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... many of the provisions of bilateral tax treaties, most of which are directly or indirectly derived from the OECD Model and Commentaries, it is not uncommon that a Court in Country A may find it useful in interpreting a tax treaty between country A and country B to refer to and gain guidance from a decision of a Court in say, country C interpreting a treaty between countries C and B or even C and D where the treaty provision is virtually the same as the treaty provision in issue. On the subject of using foreign judgments to achieve uniformity of interpretation, Lord Denning, in the case of Corocraft, said : "If such be the view of the American Courts, we surely should take the same view. This convention should be given the same meaning throughout all the countries who were parties to it" (1 Q.B. 616). The importance of uniformity of interpretation of expressions which are used in global treaty networks can thus hardly be over emphasized. 57. The decisions from treaty partner country are on an even higher pedestal than the decisions of the other Courts, because the interpretation of a tax treaty is the interpretation of a bilateral agreement made between the two Contracting States ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IBFD Tax Treaty Case Law Database. 62. The taxpayer in this case, whose name was withheld by the Federal Tax Court, was a German GmbH (limited liability company) which was held for 99.5 per cent by another German company. A GmbH, and for 0.5 per cent by B Inc., a company incorporated under the Laws of the State of Delaware (USA). The effective management of B Inc. was in Germany at the location of its branch and the B Inc. owned 99.95 per cent of the shares in A GmbH. Effectively thus, B Inc. owned the taxpayer company directly or indirectly through a German company. 63. However, when taxpayer and B Inc. opted for group taxation arrangement i.e. an arrangement under which a parent company and a subsidiary company agree that the parent company acquires the right to give directions to the subsidiary on, how to organize its business; in consideration, the profits and losses of the subsidiary are transferred to the 'parent company and consolidated' with the results of the latter company (group treatment), the tax authorities rejected the same on the ground that such a preference can only be exercised in one of the following two situations: (a) Between two companies, when register ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h was subsidiary of the US company but registered in Germany in this case, could seek treaty protection under art. 24(5) of OECD Model Convention which is exactly the same as art. 24(4) of India-German tax treaty, and that (b) to ascertain whether or not there was a discrimination against a company in which was subsidiary of a foreign company, what was examined was differentiation in treatment of such a company, i.e., a company which was subsidiary of a foreign company, vis-a-vis a company which was subsidiary of a domestic company. 68. There is one judgment from the US Court of Appeals, which will have some relevance in the present context. In the case UnionBanCal Corporation (Successor in interest to Standard Chartered Holdings Inc. includable subsidiaries) vs. Commr. of Internal Revenue 2002-2 USTC (CCH) 50, 658, the US Court of Appeal dealt with a grievance regarding discrimination of foreign capital. In this case, a US resident company, which was subsidiary of a UK company, had sold a loan portfolio to its UK parent company in 1984 for a loss. Under the US tax laws, deduction of such intra group loss was deferred until such time that the property is disposed of by the purc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foreign owned subsidiaries is all that the non-discrimination clause at issue protected it against." 69. The Court of Appeals thus affirmed the decision of the US Tax Court because the taxpayer did not show that "more burdensome" taxation was placed on British owned US subsidiaries than on US owned US subsidiaries. 70. Once again, in this case also, it was affirmed that to ascertain whether or not there was a discrimination, what was examined was the differentiation in treatment of a company which was subsidiary of a foreign company vis-a-vis a company which is subsidiary of a domestic company. That is a common thread in the judgments of German Federal Tax Court in Delaware case and in US Court of Appeals in UnionBanCal's case. 71. There is one judicial precedent on this issue from the French Supreme Administrative Tribunal (Counseil d'Etat) as well, as reported in IBFD Tax Treaty Case Law Database, and this judgment is on the same lines as the Federal Tax Court of Germany and US Court of Appeals. 72. In this case, the taxpayer, SA Andritz, was a French resident company the shares of which were held for 99 per cent by an Austrian company. The French thin capitalization rul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rative Court held that the Austrian parent company would be subject to corporate income-tax in France if it had exercised its activities in France and, consequently, that the restriction on the deduction of interest could not be applied to the French subsidiary. The Supreme Administrative Court also stated that the provisions of art. 57 CGI and art. 6(5) of the 1959 France-Austria Treaty allow the tax authorities to apply the arm's length principle to the interest rate, which may not exceed the market rate, but not to determine whether or not a French subsidiary with a foreign parent company has an acceptable debt-equity ratio. The French Supreme Court thus upheld the stand of the Tribunal, disapproved the interpretation by the Court of Appeal and concluded that thin capitalization rules would not come to the play when ownership non-discrimination provision on the line of art. 24(5) of OECD Model Convention finds place in French tax treaty with the country of domicile of the parent company. 74. It is to be noted that in this case as well, it was held that a domestic company, i.e., taxpayer company which was subsidiary of the Austrian company but incorporated in France in this cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her similar enterprises, in breach of art. 24(5) of the double tax treaty with the US or art. 25(3) of the double tax treaty with Japan ("the non-discrimination articles"). The remedies claimed, inter alia, were declarations that the ACT provisions as they applied to the taxpayer companies were illegal as being contrary either to art. 56 EC or to the non-discrimination articles. 78. As regards the claim of the taxpayers that they were discriminated against in violation of the tax treaty provisions, the High Court had held that in the context of the case the "other similar enterprises" referred to in the non-discrimination articles were UK resident subsidiaries of UK resident parent companies and that the taxation or connected requirements to which the subsidiary companies that were claimants in the case were subjected was both "other" and "more burdensome" than the taxation or connected requirements which would have applied to a UK resident subsidiary of a UK resident parent company. The argument that the subsidiary taxpayer companies and other UK resident subsidiary companies ceased to be comparable because there would have been differences between the UK tax treatments of their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l is "wholly or partly owned or controlled, directly or indirectly" by residents of the US, or Japan, or some other foreign State. In relation to art. 24(1) of the OECD Model Convention, which prohibits discrimination between residents on grounds of nationality, the commentary says that the "underlying question" is whether two residents are being treated differently "solely by reason of having a different nationality". It does not repeat this observation in relation to art. 24(5), but the principle must be the same." 80. Lord Hoffman then proceeded to answer the question that he put to himself i.e. whether s. 241 discriminate on the grounds that the capital of the subsidiary is controlled by a non-resident company. Lord Hoffman held, and his fellow Law Lords concurred with him, that there was no discrimination as two residents of different nationalities were not treated any differently. It is not really relevant to go into other aspects of the matter inasmuch as it deals with the finer issues of group income election and whether such an election can be made by the subsidiary alone. We are not really concerned with all that. Suffice to note that this House of Lords decision does n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e latter can elect under s. 247 and the former cannot, that is discrimination contrary to art. 24(5). It is irrelevant that an election would transfer liability for ACT to the UK parent but not to the US parent. The DTC is concerned with the taxation of enterprises in the UK and not with the tax position of their foreign resident shareholders. The authoritative commentary on the equivalent article of the OECD Model Convention with respect to taxes on income and on capital 1963 says that its object is: "to ensure equal treatment for taxpayers residing in the same State, and not to subject foreign capital, in the hands of the partners or shareholders, to identical treatment to that applied to domestic capital." 15. I respectfully think that this particular observation does not take the matter much further forward because it is directed to a different point. It draws attention to the limited application of the non-discrimination article, which provides only for treatment of resident tax payers and does not prevent a State from discriminating in its treatment of the income of foreign shareholders; for example, by imposing a withholding tax. It does not say that parentage cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his para forbids a principle that for purposes of Contracting State to give taxation discrimination on the less favourable treatment to grounds, of nationality is an enterprise, the capital of forbidden, and that, subject which is owned or controlled, to reciprocity, the nationals wholly or, partly, directly of a Contracting State may not or indirectly, by one or be less favourably treated in more residents of the other the other Contracting State Contracting State. This than nationals of the latter provision, and the State in the same discrimination which it puts circumstances. an end to, relates to the taxation only of enterprises ........ The text of para 1 and not of the persons provides that the application owning or controlling of this para is not restricted their capital. Its object by art. 1 to nationals solely therefore is to ensure who are residents of a equal treatment for Contracting State, but on the taxpayers residing in the contrary, extends to all same State, and not to nationals of each Contracting subject foreign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses of other States or domestic enterprises owned or controlled by non-residents with a tax treatment that is better than that of nationals, residents or domestic enterprises owned or controlled by residents" makes the basis of non-discrimination clauses even more clear. The basis of non-discrimination thus is nationality, residential status of an enterprise, and ownership or control of resident enterprises. The House of Lords was thus not quite justified in assuming that the nationality is also relevant for ownership or control non-discrimination envisaged in art. 24(5) of the OECD Model Convention. 87. Late Prof. Klaus Vogel, in his landmark treatise 'Klaus Vogel on Double Taxation Conventions', has, while dealing with the scope and nature of non-discrimination sought to be prohibited by art. 24(5) of OECD Model Convention, observed as follows: "The enterprise must no, on account of some or all of its capital being held by non-residents, be subjected to taxation other or more burdensome than taxation of similar enterprise of a Contracting State. A comparison should be made with an enterprise the shareholders or partners of which are exclusively residents. The protection again ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tantially interested, normally any change in shareholding beyond 51 per cent would disentitle the company to carry forward and set off the accumulated losses. A careful reading of s. 2(18), in turn, would show that while a subsidiary of a public company whose "shares were, as on the last day of the relevant previous year, listed in a recognised stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 (42 of 1956), and any rules made thereunder" will be treated as a 'company in which public is substantially interested', subsidiary of a public company which is not listed in a recognized stock exchange in India will not be entitled to be treated as a company in which public are substantially interested. In other words, notwithstanding the fact that two Indian subsidiaries are Indian companies and shareholding pattern of their capital has changed, the listing or non-listing of their parent companies in a recognized Indian stock exchange will be determinative factor for whether or not the disability clause provided by s. 79, can be invoked. 53. The question then is whether a foreign parent company be listed in an Indian recognized stock exchange at al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter, we are of the considered view that the provisions of s. 79 r/w s. 2(18), as they stood at the material point of time, were incompatible with the ownership non-discrimination provision set out in art. 24(4) of the Indo-German tax treaty. The precise point of ownership discrimination was this. When an Indian subsidiary had an Indian parent company shares of which were listed on any recognized stock exchange of its domicile country i.e. India, the Indian subsidiary company was treated as a company in which public were substantially interested. However, when an Indian subsidiary company had a German parent company shares of which were listed in any stock exchange in its domiciled country, i.e. Germany, the subsidiary company was not given the status of a company in which public were substantially interested. There is no rational basis for this differentiation in treatment. The status of 'a company in which public are substantially interested' has important tax implications inasmuch as the disability of carry forward and set off of accumulated losses was not attracted in a case of a company in which public are substantially interested. 92. Having said so, we may also add that we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accumulated losses on account of change in shareholding pattern, under s. 79 r/w s. 2(18), cannot be extended to the Indian subsidiaries of German parent companies as long as German parent companies are listed on a German stock exchange recognized under their domestic laws. To this extent, the rigour of s. 79 must stand relaxed due to treaty override. 95. The fact as to whether or not the German parent companies of the assessee company are listed on German stock exchanges, duly recognized under their domestic law, has not been established on record. In this view of the matter, we deem it fit and proper to remit the matter to the file of the AO for limited examination of this fact. In case, the AO finds that the shares of the German parent companies were indeed listed on a recognized German stock exchange, the disability on carry forward of accumulated losses will not come into play and the AO shall allow the carry forward as such. The matter thus stands restored to the file of the AO with directions as above. 96. As we part with this issue, we must place on record that very extensive and erudite arguments were advanced by both the distinguished counsel on the scope and applicab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar as subsequent five years are concerned, it is not open to the assessment authorities to decline the, deduction under s. 35AB in respect of the same. The adjudication on admissibility is thus required to be done only in the first year of claim, and, in case the claim is allowed in the first year, it is only a corollary to such a claim is being allowed that the balance amount is to be allowed in the subsequent years. In the present case, the adjudication on admissibility, of claim in the first year is still pending before the Tribunal, and the relevant appeal has not been argued for one reason or the other. Learned representatives have expressed their inability to argue the relevant appeal at this stage. Even on the date on which the hearing was refixed, the adjournment of hearing was sought. In such a situation, in our considered view, it would not be appropriate to deal with the issue on merits at this stage. We, therefore, deem it fit and proper to remit this issue also to the file of the AO for fresh adjudication in the light of our above observations. While doing so, the AO will give due opportunity of hearing to the assessee and shall deal with all contentions of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntinued in the rented premises instead of having own factory. The CIT(A) was not persuaded by the submissions of the assessee either. The CIT(A) was of the view that Premier Automobile decision was on peculiar facts of its own and could not be construed as a general authority for the proposition that expenses on drawings and designs was a revenue expenditure. He was also of the view that the expenses are admittedly incurred for the purpose bringing into existence a new asset, and, for that reason, expense cannot be treated as revenue expenditure. In any event, according to the learned CIT(A), the expenses pertain to the asst. yr. 1996-97 and cannot be allowed as a deduction in this year. The disallowance made by the AO was thus confirmed. The assessee is aggrieved and is in further appeal before us. 105. Having heard the rival contentions arid having perused the material on record, we are not inclined to uphold the grievance of the assessee at this stage. There is no dispute that the write off is In connection with a capital expenditure. The expenditure incurred in connection with the layout and design of a new factory are inherently in the nature of capital expenditure. The dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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